Today saw the Reserve Bank of Australia (RBA) governor Stevens reflect on the strength of the Australian economy and the implications of the strong Australian dollar.

Australia’s relatively stable economic environment and solid finances are seen to be attracting greater flows of official capital now than in recent years.

This has recently added to upward pressure on the exchange rate, independently of the terms of trade (this repeats recent similar warnings on this topic). This carries both opportunities (to borrow overseas more cheaply) and disadvantages (the competitiveness-dampening effects of the higher exchange rate).

For a time, the Governor opines, the latter contractionary force may outweigh the positive effect of a lower cost of capital.

Australian economic outlook

The key data releases of the week were the NAB Business Survey and housing finance. While housing finance remains weak and points towards soft dwelling investment over H1 2012, the NAB survey indicates that the Australian economy is growing around trend. However, there were continued signs of significant divergences across industries and states. ANZ continue to forecast dwelling investment to fall in H1, while GDP growth is forecast at around +0.8% q/q in each of these quarters. Market attention now turns towards labour force data released on April 12 and CPI data on April 24.

A broadening in the US recovery has been long awaited by markets and some initial signs are beginning to emerge. This week, the US Fed’s bank stress tests and preceding announcements from JP Morgan saw a significant sell-off in US bonds.

The stress tests revealed that 15 of 19 banks had sufficient capital to withstand a hypothetical scenario of greater than 20% house price falls and a rise in the unemployment rate to above 13%. Earlier, JP Morgan announced a 20% increase in dividends and a US$15Bn share buyback program. Greater confidence in the US banking system saw further re-pricing of Australian rates markets, which are now pricing only a 20% chance of an RBA rate cut in April. ANZ continue to forecast the RBA to be on hold in April with the next possibility of any further easing likely requiring a weakening in the labour market and CPI inflation remaining in the RBA’s comfort zone. This leaves the next probable window for an RBA rate cut in May.

In Australia, the Westpac leading index, and DEWR internet skilled vacancies data will be released. The RBA Glenn Stevens is scheduled to speak on the economic conditions and prospects of the Australian economy, which will occupy market attention.

In New Zealand, Westpac NZ Consumer Confidence and the Current Account balance data prints are expected.

In China, February Property Prices and HSBC Flash China Manufacturing PMI data will be released.

In the UK, the CPI Retail Price Index is released, as well as the Bank of England minutes.

A number of US housing market data prints will be released next week.

NAHB Housing Market Index, housing starts, and building permits are expected, and Bernanke will give a lecture at George Washington University.